The role of insurance in creating a sustainable world

Natural disasters, as a result of climate change, are increasing in frequency and severity. According to the Emergency Events Database (EM-DAT) maintained by the Centre for Research on the Epidemiology of Disasters (CRED), the number of natural disasters increased from 77 in 1970 to 361 in 2019. The World Meteorological Organisation’s analysis for the same period, records that, weather, climate and water hazards accounted for 45 per cent of all reported deaths and 74 per cent of all reported economic losses caused by disasters captured by EM-DAT. Swiss Re estimates the global catastrophe protection gap at USD 113bn in 2020.

Climate change impacts businesses across all sectors, from agriculture, energy, and construction to transportation with new and increasing risks across their supply and value chains. In addition, our recent research found 86 per cent of consumers care about sustainability and they want their financial services providers to embrace sustainability as ‘business as usual’ and help them achieve their sustainability goals. Emerging ESG regulations will require businesses to demonstrate adherence to sustainability principles and practices.

The insurance industry, as the provider of protection and risk management products, and as custodians of billions of pounds in premiums, has a major role to play shaping responses to sustainability and climate change challenges.

Sustainability and climate response provide opportunities for insurers

As insurers respond to this need through Net Zero targets, amendment of existing products and reporting on sustainability, they have an opportunity to seize a competitive advantage. Insurers that are innovative and proactive when it comes to sustainability and climate response will unearth a wealth of new opportunities.

Become a sustainability leader

There’s a significant opportunity for the insurance industry to lead the transition to a Net Zero economy.

Insurers have a critical role in supporting organisations, as they start their sustainability journeys, by identifying and helping them navigate and manage new and emerging physical, transition and liability risks, such as supply chain interruptions, risks related to new technologies and delays to projects.

Insurers are well-placed to engage and educate individual customers and business on climate change and sustainability imperatives. Insurers must demonstrate value chain stewardship by leading and influencing sectors and customers they work with in sustainability practices.

Target new market segments

Climate change is driving the emergence and growth of industry segments, such as the autonomous vehicle, the Mobility as a Service, the renewable energy and the carbon capture and storage markets. These sectors are seeing constant developments and deployments of innovative low carbon technologies that require risk solutions and insurance products – a current gap and a growth avenue for insurers.

Due to climate change, certain market segments such as small agriculture farmlands and human settlements in high risk zones are priced out of insurance, despite being most in need of it. With new technologies like drones, weather data and satellite data, and the potential to partner with local governments and multinationals, insurers could unlock new growth by innovating and offering products specifically for these market segments.

Innovate product and service offerings

Sustainability is changing the behaviours of clients and customers. For instance, energy efficient homes built sustainably are in growing demand. People are also switching to electric vehicles, renewable energy and sustainably sourced products. All these require insurers to adapt existing or develop new products. A home insurance product needs to consider new energy efficient and sustainable building materials and technologies. The motor insurance product will require coverage for electric vehicles and, subsequently, autonomous technology.

As customers look for total insurance solutions, from prevention and protection through to after-event support, insurers must consider providing more comprehensive products and solutions that consider sustainability across the whole value chain. This calls for insurers to be able to partner with broader ecosystems across various industries.

Climate change will also require and enable insurers to offer more index based or parametric insurance, particularly where the loss event is related to weather and nature.

Capturing opportunities in sustainability will require innovation

The opportunities for insurers are clear. But how to capture them is less clear.

Insurers must be bold and innovative. They must start by understanding the impact of climate change on their clients, products and channels. They will require a host of specific capabilities to drive sustainability to the fore and seize the resulting opportunities.

Some of the new capabilities and actions insurers will need include:

• a clear sustainability vision, ambition and strategy that clients, customers, employees and the wider industry can recognise
• an enhanced product development and design team that can build insights into the impact of climate change and sustainability, new technologies and the changing risk landscape across client sectors
• an actuarial function with advanced underwriting and pricing capability to assess new and emerging climate risks, determine exposure and competitively price the products
• data and analytics skills to support product development, pricing and claims management
• digital capabilities to enhance distribution and servicing
• partnering with clients and the wider ecosystem of InsurTechs, FinTechs, NGOs and governments, and solution providers to co-develop products, share capabilities and accelerate innovation
• a claims capability that enables quick settlement, brings environmental transparency and environmental-friendly offerings (refurbished products, repair instead of replacement) into the claims supply chain.

The demand for greater sustainability is here to stay and presents significant upsides to the insurance industry. The time for insurers to act is now – demonstrate sustainability leadership and provide risk and protection solutions to support the world’s transition to Net Zero.